MNI 5 THINGS: German Inflation Spikes In September

-- Both volatile and core components appear to have driven German inflation

higher

-- Today's data suggests big upside risk to consensus forecasts for Eurozone

inflation, due out tomorrow

By Jaspreet Sehmi

     LONDON (MNI) - German inflation accelerated ahead of expectations in

September, according to preliminary data released today by the German Federal

Statistical Office. On both the national CPI and EU-harmonised HICP measures,

prices picked up by 0.4% m/m, leaving the respective annual rates at 2.3% (the

steepest in nearly seven years) and 2.2% (a four-month high). These numbers

suggest strong upside risk to market projections of a 2.1% Eurozone-wide print,

due for publication tomorrow.

     We highlight five points for your attention.

     Volatile Components Provide Further Upward Pressure: Energy inflation, on

the national CPI measure, accelerated to 7.7% from 6.9% in August. As we

highlighted in our preview of today's data, Brent crude prices hit a four-year

high of just over $82/b earlier this week, and factors including heightened

geopolitical tensions have increased the likelihood of further significant rises

ahead. Energy price developments are likely to keep headline inflation elevated

throughout Q4. Food inflation, which also tends to be volatile, quickened to

2.8% y/y in September from 2.5% y/y in August, reflecting the impact of a hot

and dry summer.

     Regional Data Suggests Core Components Also Drove September Headline Gains:

While today's preliminary release does not include a detailed breakdown,

indications from state-level data suggest that September's headline acceleration

was also driven by a pick-up in core inflation. As we pointed out in our

preview, recent declines in core inflation have been driven primarily by

temporary factors and base effects, and we have been looking for it to start

moving higher again. Monthly volatility aside, we expect core inflation to trend

higher over the coming year, as companies start to pass on rising wage costs to

consumers.

     Leading Institutes Downgrade German Growth Forecasts: While we look for

core inflation to trend higher, we expect this to occur at a subdued pace. The

German economy remains healthy, but growth is being restrained by a number of

factors, thus limiting the emergence of any strong underlying inflationary

pressures. Although the domestic picture is relatively robust, labour shortages

remain a key challenge. On the external front, a number of issues continue to

weigh on confidence and investment plans, including trade conflicts, fears of a

disorderly Brexit, Italian debt concerns and slower global growth. In a report

for the German government released earlier today, five of Germany's leading

economic research institutes cited these factors in downgrading their growth

forecasts to 1.7% in 2018 and 1.9% in 2019 (from 2.2% and 2.0% previously).

     Eurozone Inflation To Rise Further Above ECB Target: Today's German data

suggests that bloc-wide inflation likely rose further above the ECB's 'close to

but below 2.0%' target in September. Markets are expecting tomorrow's Eurozone

HICP release to show annual inflation edging up to 2.1% from 2.0% in August.

However, a stronger rise, perhaps in the region of 2.2-2.3%, now looks more

likely.

     Data Supports ECB's Policy Plans: Today's data, as well as our expectations

for tomorrow's Eurozone print, lend credence to the ECB's plans to start

normalising its unprecedentedly loose monetary policy. Policymakers are keen to

reclaim some monetary ammunition, and headline inflation sticking above target

serves to justify some stimulus withdrawal. The Governing Council anticipates

ending net bond purchases at the end of the year, bar any exceptional shocks.

Meanwhile, the outlook for core inflation - despite indications of a nascent

uptrend - remains subdued, and thus supports the ECB's cautious approach to

interest rate hikes.

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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